Paid Up for Volatility!

I have continued to be mostly on the sidelines during the market volatility we have seen in the traditional financial markets. While I have tip toed into positions for the long term, I have also looked to hedge my exposure to the market with bets against certain sectors like Retail and REITs. The current rebound we have seen has certainly been impressive although I cannot say I am surprised as there have been bounces like these in past declines. However, we continue to live through unprecedented time in the economy and I cannot fathom how valuations have rebounded strongly; particularly in some industries where we will clearly see the need to time to recover which some Companies will not be able to survive.

I expect markets to continue to be irrational as they really have no substance to value most of these assets in the short term. When you consider the unemployment rates and other economic indicators we will be seeing in the coming weeks, in addition to the earnings guidance from Companies, I feel that the trend is to the downside. In addition the Volatility Index (VIX) has continued to remain elevated. In fact, the amount it goes up when we have down days exceeds the amount it goes down on up days which signal more fear in the markets that is probably priced in. It also makes the jump to options more expensive but that is the concept of insurance, right?

Call it boredom or the attempt to capture an opportunity, I have been looking at playing this thought in the markets. In addition, I have some exposure to the markets in the short term with some stock options due to be vested so I thought buying some put options will help both hedge my exposure and play an expected downturn. While I believe that the VIX increases the cost, the amount I can make on the upside will be able to pay for the loss if it does not play out. I can also have a quick short term trade as news continues to be towards the bad side in the short term.

I decided to buy some Put options on the S&P 500 ETF for the trade. I have seen these options trade at almost 5x the execution price so I think the risk/reward trade-off is worth it. It also hedges me on some of the exposure I mentioned for the short term. I have also enjoyed options given the risk/reward opportunities they provide with limited capital so it felt pretty good jumping back in with these instruments. They have burned me in the past but I continue to follow the main principals of investing and am not betting the farm in any of the positions I have deployed this year.

Another benefit of dusting off my investment trading is the fact that economic uncertainty could potentially impact me on the professional front so I need to figure out what to do if that were to happen. It has always been my long term objective to make money work for me with my investments and it could be an option although the capital base is probably not enough to sustain it for a long period. However, being prepared is not a bad idea! Stay Safe!

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